A founding father of behavioral economics — a research school that has popularized the practice of “nudging” people into making decisions that authorities deem to be in their best interests — has won the 2017 Nobel Memorial Prize in Economic Sciences.

Richard Thaler, of the University of Chicago Booth School of Business, received the award October 9 for being the leader of a discipline that has championed the idea of humans not as purely rational and selfish — as long posited by economists. Instead, he argues, we are driven by simple, often emotionally fueled assumptions that can lead us astray.

“Richard Thaler has pioneered the analysis of ways in which human decisions systematically deviate from traditional economic models,” says cognitive scientist Peter Gӓrdenfors of Lund University, Sweden, a member of the Economic Sciences Prize Committee.

Thaler argues that, even if people try to make good economic choices, our thinking abilities are limited. In dealing with personal finances, for instance, he finds that most people mentally earmark money into different accounts, say for housing, food, vacations and entertainment. That can lead to questionable decisions, such as saving for a vacation in a low-interest savings account while buying household goods with a high-interest credit card.

At an October 9 news conference at the University of Chicago, Thaler referenced mental accounting in describing what he would do with the roughly $1.1 million award. “Every time I spend any money on something fun, I’ll say it came from the Nobel Prize.”

Thaler’s research has also focused on how judgments about fairness, such as sudden jumps in the prices of consumer items, affect people’s willingness to buy those items. A third area of his research finds that people’s short-term desires often override long-term plans. A classic example consists of putting off saving for retirement until later in life.

That research in particular inspired his 2008 book Nudge: Improving Decisions about Health, Wealth and Happiness, coauthored by Cass Sunstein, now at Harvard Law School. Nudging, also known as libertarian paternalism, is a way for public and private institutions to prod people to make certain decisions (SN: 3/18/17, p. 18). For instance, employees more often start saving for retirement early in their careers when offered savings plans that they must opt out of.

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NUDGE Economist Richard Thaler explains the concept of nudge in this video from the University of Chicago. University of Chicago/YouTube

Many governments, including those of the United Kingdom and the United States, have funded teams of behavioral economists, called nudge units, to develop ways to nudge people to, say, apply for government benefits or comply with tax laws. A total of 75 nudge units now exist worldwide, Thaler said at the news conference.

Nudging has its roots in a line of research, dubbed heuristics and biases, launched in the 1970s by two psychologists — 2002 economics Nobel laureate Daniel Kahneman of Princeton University and the late Amos Tversky of Stanford University. Investigators in heuristics and biases contend that people can’t help but make many types of systematic thinking errors, such as being overconfident in their decisions.

Thaler, like Kahneman, views the mind as consisting of one system for making rapid, intuitive decisions that are often misleading and a second system for deliberating slowly and considering as much relevant information as possible.

Despite the influence of Thaler’s ideas on research and social policy, they are controversial among decision researchers (SN: 6/4/11, p. 26). Some argue that nudging overlooks the power of simple rules-of-thumb for making decisions that people can learn to wield on their own.